June 24, 2003

Scrimp and save  

Nathan Newman has a post demonizing the 401(k) program; basically his argument is that allowing these savings to exist tax-free not only takes away a huge chunk of potential government revenue, but it encourages the savers to lobby congress for tax cuts so that when the accounts mature, they won't have to pay as much. I've never thought about this second problem before - I suppose you could solve it by passing a law the freezes the tax rate at levels from the deposit year, but that would add a lot of complexity to the system. I guess I don't have a satisfactory answer, but I will say that we don't need skewed incentives like these for citizens to be gaming the tax system.

But the first complaint - the idea that tax-deferred savings is taking a huge chunk of government revenues - seems a little short-sighted. Americans have a serious savings problem - we don't save nearly as much as the Japanese or even the Europeans. On a macroeconomic level, this means a huge current account deficit, because as a country we spend more than we make, which forces us to borrow from other countries to finance our spending. The 401(k) program doesn't just serve individual savings needs - it also creates huge incentives for Americans to save, which helps keep that current account deficit down. Yes, the deficit is already enormous, but think how much bigger it would be without a 401(k) program! So, yes the government might have more revenues and less debt if there were no program, but there would also be substantially more foreign ownership of American assets.


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